Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

Gray’s friend Johnson offered to act as co‐borrower to help Gray buy a house, if Gray promised that she would only be on the loan as a co‐borrower for two years. In return, Johnson received a finder’s fee from the daughter of the builder-seller (Hinrichs). Mortgage broker Bowling sent their application to Fremont, a federally insured lender specializing in stated‐income loans, with which the lender typically did not verify financial information supplied by applicants. Bowling testified that he told both women that they would be listed as occupants, that their incomes would be inflated, and what the monthly payment would be. The closing proceeded; Gray and Johnson received a $273,700 mortgage from Fremont and, on paper, a $48,300 second mortgage from Hinrichs. Gray and Johnson acknowledge that the application that they signed contained several false statements. Bowling became the subject of a federal investigation. Sentenced to 51 months’ imprisonment, he agreed to testify against his clients. The Seventh Circuit affirmed the convictions of Gray and Johnson under 18 U.S.C. 1014, which prohibits “knowingly” making false statements to influence the action of a federally insured institution. Rejecting an argument that the district court erred by denying an opportunity to present testimony to show Bowling’s history of duping clients, the court stated that his prior wrongdoing was not very probative of Gray’s and Johnson’s guilt. View "United States v. Gray" on Justia Law

Before its 2007 bankruptcy, Sentinel was an investment manager. Its customers were not typical investors; most were futures commission merchants (FCMs), which operate in the commodity industry like to the securities industry’s broker‐dealers. Through Sentinel, FCMs’ client money could, in compliance with industry regulations, earn a decent return while maintaining the liquidity FCMs need. To accept capital from FCM customers, Sentinel had to register as an FCM, but it did not solicit or accept orders for futures contracts; it received a no‐action letter from the Commodity Futures Trading Commission (CFTC) exempting it from certain requirements applicable to FCMs. Sentinel represented that it would maintain customer funds in segregated accounts as required under the Commodity Exchange Act, 7 U.S.C. 1. In reality, Sentinel pledged hundreds of millions of dollars in customer assets to secure an overnight loan at the Bank of New York. Sentinel’s bankruptcy trustee claimed fraudulent transfer, equitable subordination, and illegal contract, in an effort to dislodge the Bank’s secured position. The district court rejected all of the claims. The Seventh Circuit reversed, rejecting a finding that Sentinel’s failure to keep client funds properly segregated was insufficient to show actual intent to hinder, delay, or defraud. View "In re Sentinel Mgmt. Grp., Inc." on Justia Law

Rosen, as owner of Kully Construction, submitted a development plan to the city of East St. Louis for a $5,624,050 affordable housing project to be constructed with a combination of private and public funds: $800,000 in federal grant funds, $1,124,810 in Tax Increment Financing (TIF), and $3,699,240 from Rosen and Kully. Rosen constructed elaborate lies about his credentials and history. After obtaining a contract for 32 units, Rosen learned that the project was under-funded by about $2.7 million dollars. To conceal the problem, Rosen misrepresented to the city that he could build 56 units without increasing construction costs, then substituted less-expensive prefab modular housing units in place of the promised new construction; he nonetheless submitted an itemized list of materials and expenses related to construction. He also submitted falsified tax returns to obtain financing and falsified statements that he had obtained financing. After the scheme was discovered, Rosen pleaded guilty to seven counts of wire fraud, and based on the court’s calculation of the loss amount and determination that Rosen was an organizer or leader of criminal activity, was sentenced to 48 months in prison. The Seventh Circuit affirmed. View "United States v. Rosen" on Justia Law

Greenblatt, the “bad boy of Chicago arbitrage” became involved in litigation concerning use of his “web of corporations,” including Loop Corporation and Banco. In 2000, Banco extended a $9.9 million line of credit in exchange for a blanket lien over Loop’s assets. Loop defaulted; nevertheless, Banco expanded the line of credit by several million dollars in 2002 and continued lending Loop money until 2004. Banco lost senior creditor status when the district court voided the lien in an earlier case. In 2001 Loop purchased millions of shares of EZ Links stock from Golf Venture, giving a promissory note. Loop defaulted; Golf Venture won a judgment of $1.2 million. Also in 2001, a failed margin transaction left Loop indebted to its brokerage firm, Wachovia, in the amount of $1,885,751. Wachovia took Loop to arbitration and won a $2,349,000 award in 2005. Wachovia is still trying to collect. Loop had transferred almost all of its valuable assets to another Greenblatt company, leaving only the EZ Links stock, in possession of Banco, and Banco claimed to have creditor priority over Wachovia. The district vourt pierced Loop’s corporate veil, allowing Wachovia to reach Greenblatt’s assets, and voiding Banco’s lien, and ordered the sale of Loop’s only asset, EZ Links stock. Banco attempted to contest the d decisions. The Seventh Circuit dismissed Banco’s appeal for lack of standing. View "Wachovia Sec., LLC v. Loop Corp." on Justia Law

Bank of America lost approximately $34 million when the Knight companies went bankrupt. BOA sued, claiming that Knight’s directors and managers looted the firm and that its accountants failed to detect the embezzlement. The district court dismissed. The accountants invoked the protection of Illinois law, 225 ILCS 450/30.1, which provides that an accountant is liable only to its clients unless the accountant itself committed fraud (not alleged in this case) or “was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action” The court found that BOA did not plausibly allege that the accountants knew that Knight’s “primary intent” was to benefit the Bank in alleging that the accountants knew that Knight would furnish copies of the financial statements to lenders. The Seventh Circuit affirmed, noting BOA’s choice not to pursue its claims in the bankruptcy process. View "Bank of America, N.A. v. Knight" on Justia Law

abiu worked as a bank teller, 2003-2007. He searched account records for account holders with balances exceeding $100,000, then stole their information and, along with codefendants, compromised that information to divert money into fraudulently opened bank accounts. Postal inspectors lawfully searched his home and seized notes containing names, Social Security numbers, and account information of 86 customers, and an unspecified number of fake driver’s licenses and Social Security cards bearing the names of some of those customers, but only 17 customers suffered a loss. The losses were reimbursed by the banks. Rabiu pleaded guilty to bank fraud and aggravated identity theft, 18 U.S.C. 1344, 1029(a)(2), 1028A(a)(1), admitting participation in the scheme, but insisting that some of the names and identifying information on the phony driver’s licenses and Social Security cards were fictitious and not from customers. The government successfully sought a four-level upward sentencing adjustment under U.S.S.G. 2B1.1(b)(2)(B) based on 50 or more victims. The government cited a definition of “victim,” which, for offenses involving identity theft, was broadened in 2009, after Rabiu’s arrest, to include “any individual whose means of identification was used unlawfully or without authority.” The Seventh Circuit affirmed. Although the court overstated the number of victims, it was clear that the judge would have imposed the same sentence even had he accepted Rabiu’s calculation; the error was harmless. View "United States v. Rabiu" on Justia Law

Green sued under the Truth in Lending Act, 15 U.S.C. 1606, claiming that U.S. Cash Advance misstated her loan’s annual percentage rate. The lender requested arbitration under the loan agreement, which referred to “binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum.” The agreement was signed in 2012; the Forum has not accepted new consumer cases for arbitration since 2009, when it settled a suit alleging bias in merchants’ favor. The lender asked the court to appoint a substitute arbitrator under 9 U.S.C. 5. The judge declined, stating that identification of the Forum as arbitrator was “integral.” The Seventh Circuit reversed, reasoning that the agreement calls for use of the Forum’s Code of Procedure, not for the Forum itself to conduct proceedings. The court noted that the lender will have to “live with” the judge’s broad discretion in choosing an arbitrator, who might be familiar with practices in the payday loan industry or open to use of claimant classes in arbitrations, perhaps on a theory “that a consumer who would not voluntarily waive her rights under the Truth in Lending Act probably should not be deemed to have implicitly waived her right to the only procedure that could effectively enforce those rights.” View "Green v. U.S. Cash Advance IL, LLC" on Justia Law

An Illinois judgment creditor may, without court action, require a third party to freeze property of a judgment debtor until a court determines whether the creditor has a valid claim, by serving the third party with a citation to discover assets. If the third party releases the property without court order, the third party may be liable to the creditor for property that was released. Mendez was awarded $387,931 in damages for unlawful abuse suffered at the hands of her employer. She served more than 50 citations to discover assets on the employer and banks where she believed the defendants had deposited assets. She successfully fought the employer’s fraudulent attempt to declare bankruptcy. She has recovered only $99,519.97. Mendez served Republic Bank a citation, requiring the bank to freeze accounts held under the names of 22 entities that Mendez believed contained assets belonging to her former employers. Republic Bank froze all of the listed accounts. Interveners, who owned only a subset of the accounts frozen, obtained a court order that the bank claims unambiguously required it to unfreeze all accounts, except two that were specifically mentioned as remaining frozen. The Seventh Circuit held that Republic Bank is not liable because the most reasonable reading of the order unfroze the accounts in question. View "Mendez v. Republic Bank" on Justia Law

In 1968 French founded a successful manufacturing firm that he sold, in 1996, for about $200 million. French executed interlocking irrevocable trusts to benefit his four children upon his death. In 2004 he moved the trust accounts to Wachovia Bank. The trusts held two whole life insurance policies. Wachovia replaced the policies with new ones, providing the same benefit for a significantly lower premium, after months of evaluation and consultation with French and his lawyers. Wachovia received a hefty but industry-standard commission for its insurance-brokerage affiliate. French’s adult children sued Wachovia for breach of fiduciary duty by self-dealing. The district court rejected the claim, based on the trust document’s express conflict-of-interest waiver, and held that the transaction was neither imprudent nor undertaken in bad faith. The court ordered the Frenches to pay the bank’s costs and attorney’s fees. The Seventh Circuit affirmed. The trust documents gave Wachovia broad discretion to invest trust property without regard to risk, conflicts of interest, lack of diversification, or unproductivity. The trust instrument overrides the common-law prohibition against self-dealing and displaces the prudent-investor rule. While there is always a duty to administer the trust in good faith, there was no evidence that the bank acted in bad faith. View "French v. Wachovia Bank, N.A." on Justia Law

The Palomars filed for bankruptcy under Chapter 7. The trustee reported that the estate contained nothing that could be sold to obtain money for unsecured creditors. A discharge of dischargeable debts was entered and the bankruptcy case was closed. The day before the trustee issued his report, the Palomars had filed an adversary action against the bank that held a second mortgage on their home. The balance on their first mortgage, but the house was valued at $165,000. The Palomars argued that the second mortgage should be dissolved under 11 U.S.C. 506(a). Deciding that the adversary action was meritless, the judge refused to reopen the bankruptcy proceeding. The district court and Seventh Circuit affirmed, noting that the only debts normally extinguished are those for which a claim was rejected. The bank made no claim; this was a no-asset bankruptcy. Failing to extinguish the lien only deprives the debtors of the chance to make money should the value of their home ever exceed the balance on the first mortgage. View "Palomar v. First Am. Bank" on Justia Law